Credit is tightening.....are you feeling it ?

Credit is tightening.....are you feeling it ?

Interest rates have risen, by a lot. Payments on new housing and car loans have gone up due to the higher interest rates. Also, the prices have gone up due to inflation and the compounded effect has made the assets much less affordable.

⬆️ interest rate + ⬆️ price = ⬆️ monthly payments = ⬇️ affordability

There is another aspect to this equation and that is the availability and access to credit.

Credit has, for decades, been a driving factor of the American economy. In comparison, the average consumer or business in a socialist or developing country does not have easy access to affordable credit.

This access to credit has been a double edged sword to the American consumer.

The good sides of credit in America 👇

  1. It has helped a consumer throughout their lifetime.
  • Auto loans
  • Mortgage
  • College Loans
    Most Americans have been availing these loans without any conditions or collateral requirements. Without access to affordable credit, car and home ownership or college education will not be possible.

From a financial perspective home ownership has been the first step toward wealth building for the past 3 generations of Americans. And homeownership has been made possible due to access to affordable home mortgages.

  1. Access to credit has been a primary driver of small businesses across America.

For Americans who wanted to start a small business, credit was :

  • Accesible
  • Affordable
  • Did not require a collateral

Small businesses

  • Account for almost 99% of the country's employers
  • Employ close of 50% of the workforce
  1. The past decade saw steep decreases in interest rates. This led to access to cheap credit and large corporations have been a huge beneficiary.

Companies saw high growth rates and the stock markets saw historical high returns thanks in part to the low interest rates and cheap credit availability.

Despite all the growth and prosperity, there have been negative impacts as well.

  1. Consumers are drowned in credit card, college loans and other debt. A lot of purchases have been made because of the promise of credit availability.

  2. Huge pockets of bubbles have been formed across the economy, industries and corporations due to the fluff created by low interest rates and easy credit.

It is 2023 and the interest rates are going up. Inflation is compounding and prices across the board, both essentials and luxuries, are skyrocketing.

Today's WSJ has an article on ways to finance your home in the absence of an affordable mortgage product...

  1. Use your investment portfolio as a collateral
  2. Use any other assets as collateral
  3. Liquidate assets

These are sensible options especially for folks who have the need to buy their primary home.

But this is a huge fall from a traditional 30-year mortgage that Americans have enjoyed for the past 3 generations.

This is the 'rice and beans' version of homeownership 😮😳😨

Additionally, the country is facing its own debt crisis. The debt, as well as the debt to gdp ratio are at historic levels.

All this have led to banks tightening the credit availability.

What does this mean 🤔

  • It will not be so easy to get loans
  • The eligibility criteria has been raised higher with the need for collateral and better incomes, credit scores and more.
  • Interest rates are higher, so credit has become more expensive

This affects consumers, small business and large corporations alike and will have an impact on the overall economy.

Are you feeling it 🤔